Today we are going to look at Boustead Projects Limited (SGX:AVM) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Boustead Projects:
0.079 = S$29m ÷ (S$566m - S$197m) (Based on the trailing twelve months to March 2019.)
So, Boustead Projects has an ROCE of 7.9%.
Check out our latest analysis for Boustead Projects
Does Boustead Projects Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Boustead Projects's ROCE is meaningfully higher than the 4.3% average in the Construction industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Aside from the industry comparison, Boustead Projects's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Boustead Projects's current ROCE of 7.9% is lower than 3 years ago, when the company reported a 11% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Boustead Projects's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. If Boustead Projects is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.